Sweeping changes to ATO penalties urged

A key tax watchdog has recommended a dramatic overhaul of the Australian Taxation Office’s harsh penalty regime and protracted advice process.

The inspector-general of taxation,
Ali Noroozi
, said that his 33 recommendations were drawn from taxpayer concerns that the more than 25-year-old self-assessment regime has swung back to a quasi-full assessment regime – imposing hefty costs, and without the benefits that used to come with it.

“I have made a number of recommendations to improve the penalties and interest regime," Mr Noroozi said, after the federal government released his report late on Wednesday.

That included pushing the onus on to the ATO to prove penalties and lifting the $10,000 threshold at which they might apply – possibly to $100,000. He also flagged capping interest charges where an ATO adjustment takes more than two years.

Assistant Treasurer
David Bradbury
has agreed to consider some of the proposals on penalties.

While small businesses and individuals may view as a win the government’s agreement to consider the issues, they may spurn the one recommendation rejected: slashing penalties where the ATO has not given guidance on a topic.

“Where no ATO advice exists on a particular area, I have recommended that penalties and interest do not apply as long as taxpayers take reasonable care," said Mr Noroozi.

In response, the government said that allowing such a “blanket protection" could pose a “significant risk to the revenue".

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The inspector-general has tried to push the ATO to provide more guidance – and sooner – on its views through another crucial recommendation: involving the tax man at earlier stages of law design.

The government has agreed in principle to bring the ATO into the tax law design process.

On Mr Noroozi’s recommendation, paid external advisers could sit on the design team.

The ATO has received harsh criticism in recent years for its interpretation of new laws and for apparent changes in position on existing laws. The inspector-general has recommended the government consider forcing the ATO to bring out timely public binding advice with substantial new laws.

Other key initiatives backed by the government include a shift to issuing private rulings without demanding extra information from taxpayers, which has led to mini-audits.

Curiously, the government has noted that taxpayers have a “safe harbour" where they have relied on a tax agent, despite a contrary ATO view. It has similarly “noted" a recommendation to consider giving the ATO the power to withhold punishment from taxpayers where a law has “unintended, anomalous, inequitable or, impractical consequences", until fixed by Parliament. Hefty penalties applied to excess superannuation contributions, which have caused significant angst and public backlash, could fall in to such a category.

The ATO has agreed to publish more data on its compliance activities, consult with experts from outside the office on its interpretation of court cases and on detail demanded in tax returns, and issue more determinations. Decisions to extend the time taken to review a taxpayer’s situation will require senior executive approval.

It has refused to elevate its income tax guides – Tax Pack and e-tax – to public ruling status.